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Analysis and Prediction:

Date of publication: September 25, 2017 | Author: Tim Clayton

Last Week’s Summary

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The Federal Reserve left interest rates on hold in a 1.00-1.25% range following the latest policy meeting which was in line with consensus forecasts, but the dollar did make gains following the release.

Why did the dollar gain?

Expectations are always extremely important for markets, as was illustrated by strong Sterling gains the previous week following the Bank of England policy meeting.

Ahead of the Fed policy meeting, there were doubts whether the Fed would increase interest rates again this year.  According to the statement, however, 11 of the 16 committee members were expecting a further rate hike this year while one member expected 2 increases. Among voting members, there was also a majority to increase rates.

The consensus view on the committee was also that rates would increase three times during 2018.

The higher than expected forecasts were crucial in pushing the dollar stronger.  

Subsequent US data releases were firm with the Philly Fed manufacturing index strengthening to 23.8 from 18.9 the previous month. There was evidence of a stronger increase in prices in the Philly Fed survey and the national PMI data also suggested that inflation pressures had increased in the latest month.

Higher inflation will tend to support expectations of further interest rate increase, but the dollar was unable to sustain the gains seen following the Fed statement.


UK retail sales data was stronger than expected with a 1.0% increase in volumes for August which triggered further gains for Sterling, although it failed to hold its best levels.  

The main focus was on politics during the week with Prime Minister May making a key Brexit speech in Florence on Friday.

In her speech, May confirmed that the UK would look for a 2-year transitional period after leaving the EU and that the UK would meet its financial obligations. There was some disappointment over a lack of detail in the speech and Sterling dipped lower given that a positive outlook had been priced in.


ECB sources suggested that there were disagreements over the bond-purchase programme and that some decisions would be delayed until the December meeting.

The Euro again proved resilient during the week with retreats continuing to attract buying support on expectations that monetary policy would be tightened eventually.  

German Chancellor Merkel’s CDU Party remained the largest party in the German Federal election, but fell short of expectations with the far-right AfD party complicating coalition talks.

Overall, EUR/USD again found support below 1.1900, but with resistance close to 1.2000.


There was volatile trading in the Australian dollar with sharp falls following a slide in iron-ore prices and reduced speculation over higher interest rates, although there was strong buying support on dips.

In the New Zealand General Election, the governing National Party won the largest number of seats in parliament, but fell short of a majority with the New Zealand First party holding the balance of power.

Next Week’s Forecast & Events

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The most important element during the week is likely to be developments surrounding tax reform with Republican proposals due to be released during the week.

Evidence of a consensus over tax cuts would increase confidence in the growth outlook and raise expectations of higher interest rates which would also tend to strengthen the dollar.

There are significant US data releases during the week, although it is doubtful whether there will be a major market impact, especially with potential distortions from the impact of Hurricanes Harvey and Irma

Consumer confidence data is scheduled for release on Tuesday with durable goods orders data on Wednesday and jobless claims on Thursday.

The latest PCE prices data will be released on Friday and could have a significant market impact.

What is the PCE price index?

The Personal Consumption Expenditure (PCE) prices index is simply an alternative measure of inflation. Most attention focuses on the Consumer inflation (CPI) data and the PCE data is a slightly different way of calculating the inflation rate.

It is important because the PCE data is the preferred measure used by the Federal Reserve.  If there is upward pressure on the PCE, there will be pressure to raise interest rates. If the PCE inflation rate remains below 2%, there will tend to be caution over rate hikes.

Markets will continue to monitor comments from Federal Reserve officials during the week.


The final reading of UK GDP and the second-quarter current account data will be released during the week, although there is unlikely to be a significant impact on interest rate expectations.

Political considerations will be monitored closely as Brexit negotiations are due to resume and will enter a new chapter following the German Federal elections.

In broad terms, any evidence of a more constructive approach from both sides would tend to support Sterling.


The latest Euro-zone inflation data will be released and could have an impact on October policy expectations if the data is much higher than expected.

Comments from ECB officials will continue to be monitored closely during the week.

Developments in forming a German coalition government will also be an important focus during the week. Stalemate would tend to undermine the Euro.


North Korea will continue to be an important focus, especially if there are further missile launches by the Pyongyang regime.

Markets will be waiting for news on forming a New Zealand government with sharp NZD losses if the National Party fails to form a government.

Currency Forecast for Next Week

Currency pairSpot 1-week forecast1-month forecast


 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

Information expressed in this article and on as a whole does not constitute as financial advice. If you decide to make any actions based on the information you read, we shall not be held responsible.


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